Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to U.S. civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLE "INTENDED AUDIENCE FOR BLOG; CAUTIONARY NOTE TO LAY READERS." Thank you.

Wednesday, February 4, 2015

UBS, Perhaps, Does Not Know When to Quit or Tell the Truth (2/14/15)

Just picked this up. Christopher M. Matthews and Devlin Barrett, UBS Faces a New, Tax-Evasion Probe (WSJ 2/4/15), here. I will offer further comments on it tomorrow. In the meantime, certain excerpts from the article:

Prosecutors in the U.S. attorney’s office in Brooklyn are weighing evidence gathered with the Federal Bureau of Investigation to determine whether employees of the bank helped facilitate tax evasion or engaged in securities fraud, people familiar with the investigation said. Authorities are also trying to determine whether anyone at the bank engaged in criminal efforts to cover up the alleged conduct once it became more widely known about within the bank.

UBS was recently served with a subpoena from authorities related to the matter, according to people familiar with the case. Prosecutors and FBI agents recently traveled to London to interview potential witnesses, the people said.

* * * *

UBS recently hired attorney John F. Savarese, [bio here] a partner at Wachtell, Lipton, Rosen & Katz, to conduct an internal investigation, according to the people familiar with the case. Such probes can cost banks millions of dollars in legal fees. Mr. Savarese didn’t respond to requests for comment.

The alleged practices under scrutiny at UBS hark back to an old-fashioned type of tax evasion. At issue is the marketing of bearer securities as an investment to American clients, a financial tool whose use U.S. authorities largely ended because of its potential for abuse. Bearer securities were once popular because they were preferable to bulk cash payments, but a 1982 law imposed a variety of sanctions and tax penalties that made it very difficult to use or deposit such a certificate at a U.S. bank.

Traditionally, bearer securities were issued in one of two ways. Bearer bonds, also known as coupon bonds, can be issued by banks as debt certificates in large denominations, sometimes millions of dollars each, that can be redeemed at certain banks by whoever possesses them. Some banks and other companies issue bearer shares, an equity share in a company, which is similarly owned by whoever holds it. Companies issuing bearer securities typically don’t register the securities’ owners or track transfers of ownership.

Bearer securities can be a risky investment, because they are easily transferable and nearly anonymous, which means they can be stolen and cashed. For that reason, they have been used to cheat on taxes. By keeping an interest-bearing account or document with no ownership trail, and no forms filed to the IRS, the holder of such a certificate can hide assets and income from tax authorities. Today, bearer bonds can also be maintained strictly as an electronic account, generating a set rate of interest.

It isn’t clear when the alleged conduct in the UBS matter is purported to have begun. Investigators believe some potential misdeeds occurred after the expiration of bank’s 2009 agreement with the Justice Department, which resolved its previous tax-evasion case and put off any related prosecution as long as the bank didn’t get into additional trouble in the following 18 months. The people familiar with the current probe said authorities don’t believe the new issues constitute a violation of the terms of that settlement.

UBS’s woes stem from more than simply potentially marketing such investments to American clients or managing them, according to people familiar with the investigation. At one point, these people said, bank employees allegedly discussed how to deal with the potential legal problems of such transactions, and how they might hide them from authorities. For that reason, investigators are trying to determine the exact nature of those alleged discussions and whether they amounted to a criminal effort to conceal what had allegedly already been done.

Long-time readers of this blog know what I think of Swiss banks. Not all of them, but some of them (UBS easily fits in the category). UBS may be said to give Swiss banks a bad name. There is probably some truth in that. But, like all hyperbole, it is ... , well, hyperbole.

One wonders if these are old situations. What the (obviously leaked) story does indicate is that exploration of Swiss banking shenanigans is far from over. (A cynic might notethat the leaked story coincides with the the AG confirmation hearings--your readers will note that the US Attorney for SDNY (Brooklyn) is one Lorretta Lynch, the AG nominee.)

And don't you love commencing the "independent investigation" designed to find that senior officials at the bank knew nothing and that the activity was limited to a narrow group of "renegades?

Next up: insurance wrappers--buy a life (or other) insurance policy wrapped around an offshore investment account, and freely access the money through loans while the investment income accumulates tax free. Not as toxic as bearer securities but were retailed to US taxpayers for sure, and were tax equivalent of a nominee Swiss account. The French and German tax authorities have been on to this scheme for a number of years. CS was a player too.

Wonder how the settlements were worded--do they cover sort of related activity or were they narrowly confined.

But FBAR instructions specifically say that stocks and bonds directly held are not reportable on the FBAR. So this is a perfectly legal way to avoid FBAR requirements, just as is cash under a (foreign) mattress.

Foreign stocks and bonds held directly may not be reportable on the FinCEN 114 (FBAR), but they are generally reportable on the Form 8938 with your 1040 beginning in 2011 forward, assuming you otherwise meet the filing criteria. In other words, if it were a legal way to completely avoid disclosing these assets, it is no longer the case.

Obviously, if the stocks/bonds were in a foreign financial account, then the account may be reportable on the FinCEN 114 as well as the 8938.

Not sure if you saw this recent article on HSBC Switzerland but further confirms some of your worst criticisms of the Swiss banking system (and these shenanigans apply not just to US but to global taxpayers): http://www.theguardian.com/business/2015/feb/08/hsbc-files-expose-swiss-bank-clients-dodge-taxes-hide-millions

It is no surprise that the US banks are now fighting the reciprocity of FATCA and other international exchange agreements.

Here is an excerpt:

"In the appeal, the Florida and Texas Bankers Associations plan to argue the following:

• This is not a case about U.S. tax avoidance, as interest earned by foreign non-residents on bank accounts is not subject to federal taxation in the United States;

• All bank accounts in the United States are already subject to extensive depositor identification requirements, including the Bank Secrecy Act;

• Bank deposit information is already accessible by federal tax and law enforcement agencies, as well as state and local authorities, through individual administrative requests, hundreds of thousands of which are uniformly provided;

• The concern on the part of the banking industry is the new feature of the regulation calling for the automatic sharing of depositor information with home countries including countries where bank customers understandably fear the release of their personal finances.

"It is the same argument that Swiss banks have made.Are there any US banks that hold criminal or undeclared(to a foreign government) accounts? Texas alone has already seen an outflow of $500 million.

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